January 17, 2017

I've been caught 100% off guard by the GOP's 'border adjusted' corporate income Tax proposal. I knew it was floating around and I'd heard the tag lines, but I'd was not taking it seriously. Now it may be for real, in some form, but not the advertised form? I see that Trump wants changes from the Ryan version.

In any case, I need to do some reading. There is surprisingly (unsurprisingly?) very little out there on the topic and headline tax guys are rushing to write papers.

For starters, I understand how border adjustments work in VAT systems, but the GOP proposal is different, if I understand it correctly, like a VAT but with deducibility of labor costs (and some capital costs??? -- here things seem to get hard to understand). I don't yet know how to think about this. Also, importantly, implementation is based on what accounting systems actually do and can be made to do given incentives to structure income into tax accounting buckets, and given how the tax system builds on existing accounting and tax history.

And the politics looks brutal for the GOP coalition, unless the incidence shift to Democratic groups (always possible).

First, this tax system is very difficult to explain to public or, even, experts. Thiscreates a risk that loopholes will be easier to design due to the deliberateexploitation of the system’s complexity by savvy tax planners and lobbyists. Yet ifthe system is implemented in a more theoretically pure form, without opening thedoor to loopholes, it is not clear that the MNC business community would supportthe proposed changes. The net effect would be a tax increase for the intangible intensiveMNCs that had previously succeeded in achieving single-digit tax rates bygaming the old system (and shifting U.S. profits abroad). It is also a tax increase forhighly-leveraged firms, since debt-financed investments would no longer besubsidized. Retailers that import into the US and manufacturers that import partsare likely to object to a new tax system that means they cannot deduct their cost ofgoods sold.

Second, there is an increased likelihood that many profitable firms would showlosses. This is especially the case for exporters, since they may have deductibleexpenses, but no taxable revenue. Exporting firms with persistent losses will findthe credits do them no good, which would affect export incentives. Whileeconomists would support a refund system in order to keep tax neutral, there is alarge potential for fraud, and politically it seems unlikely that the government couldissue large checks to profitable corporations on a permanent basis. The alternativesuggested by the Blueprint is unlimited carry-forwards, but this doesn’t solve theproblem for businesses with losses that may not be offset. Exporting companiescould of course merge with non-exporters in order for the losses to be more useful,but inducing a slew of tax-motivated mergers would be inefficient.

...there are myriad technical problems that remain to be worked out. Forexample, financial institutions require separate treatment. The pure form of this taxleaves out financial flows entirely. An augmented form of the tax can capturefinancial transactions in the base, but this would introduce complexity as allcompanies would need to keep track of financial transactions, as well as whether thetransactions occurred with foreign companies. There is also substantial ambiguitybetween what transactions are real and what are financial, and such ambiguityraises both technical considerations as well as opportunities for tax avoidance

Indeed, the corporate rate chosen is intellectually incoherent. One of the purportedadvantages of a destination-basis corporate cash flow tax is that it is supposed tocurb profit shifting by removing the incentive for shifting profits and activitiesabroad. But, if that is the case, why is the rate cut needed? If tax burdens trulydepend only on the location of immobile customers, why not keep the corporate rateat the same level as the top personal rate? The usual argument for the lower raterelies on the international mobility of income and competitiveness concerns. If suchconcerns are moot, then there is no reason to tax at a low rate.

Further, the discrepancy between the top personal rate and the business rate willcreate new avoidance opportunities as wealthy individual seek to earn their incomein tax-preferred ways, reducing their labor compensation in favor of businessincome. Companies would be inclined to tilt executives compensation toward stock optionsand away from salary income, and high-income earners would be inclined toearn income through their businesses in pass-through form.

The Ryan proposal exempts the normal return from capital, giving these returnszero-tax treatment. Further, excess returns (profits above the normal level) aretaxed through the business tax system, but at rates far lower than the top personalincome tax rate. The theoretical rationale for justifying such a favorable taxtreatment for rents (excess profits) is simply absent. From an efficiency or an equityperspective, taxing rents at a higher rate makes sense.

Recent evidence from Treasury suggests that now about 75% of the corporate taxbase is rents/extra-normal profits; this fraction has been steadily increasing. Ifdestination-based taxes are meant to fall solely on rent, this implies a higher idealoptimal tax rate, since taxing rents is far more efficient than taxing labor or capital.

October 24, 2012

Twenty-six years ago today, President
Ronald Reagan signed a sweeping bipartisan tax reform that chopped the
top individual income tax rate from 50% to 28%; curbed special
deductions, exclusions and breaks; gave most families a tax cut; left
the richest 1% paying a slightly higher share of taxes; and didn’t add
to the deficit.

In short, the Tax Reform Act of 1986 did
much of what former Massachusetts Governor Mitt Romney says he will do
as president. The Republican candidate’s tax plan would make the
expiring Bush tax cuts permanent and then cut individual income tax
rates a further 20%, bringing the top rate down from 35% to 28%. Romney
says these cuts can be financed primarily by limiting itemized
deductions or other tax breaks for the well off—and without decreasing
the share of income taxes paid by the wealthy, raising taxes on those
earning less than $200,000, or increasing the deficit. ... [I]t would be
harder for Romney to get to a 28% top rate. Here are 10 reasons why.

Reagan shifted the tax burden to business, Romney isn’t likely to

Reagan raised the tax on capital gains; Romney won’t

Romney wants to get rid of the estate tax

Romney says he’ll preserve existing savings incentives

…And add new ones

The 1986 reform didn’t have to raise revenues

The baseline has become a ticking bomb

The income tax is no longer broad based

The 1986 reform hit tax shelters and arbitrage hard

Reagan didn’t have to fix a $1 trillion AMT hole

Romney is stuck in the 1980s, not in term of goals but also in terms of what he perceives as the possibilities.

September 21, 2012

There's a lot of interesting stuff going on behind the scences. What Romney releases looks very partial and misleading.

Final 2011 return:

Adjusted gross income: $13,696,961

Total federal tax paid: $1,935,708

Effective federal tax rate: 14.1 percent

Preliminary 2011 return (released in January):

Adjusted gross income: $20,901,075

Total federal tax paid: $3,226,623

Effective rate: 15.4 percent

So here's the mystery: Between January and October of this year, Romney's adjusted gross income for 2011 fell by $7.2 million. ... The most likely explanation is that Romney's accountants transferred
income from Romney's personal return to one of the three trusts that
also generate considerable income, almost all of it from investments. It
will take a detailed examination of the 2010 and 2011 documents to
figure out what changed, but here's a clue: Romney's campaign has begun
to focus on the "personal" tax rate paid by Romney, rather than the tax
rate that might be associated with the trusts and his total income
from all sources.

Tax avoidance isn't just about getting low rates, it's about shifting income. When you hear that Romney paid 14.1% in taxes in 2011, the big question is 14.1% of what? His 'economic income' is most likely much higher than his taxable income, so his real effective tax rate (= taxes paid/economic income) is much less than 14.1%. Even assuming his 2011 income is only (certainly an understatement) what he initially reported, $20,901,075, his 2011 tax rate was 9.3%.

The same reasoning applies to Romney's statements that he's not paid a rate lower than 13.2% since 1990. Income in trusts isn't covered.

September 11, 2011

I read William Rowe's China's Last Empire: The Great Qing this summer, but I never got around to writing a blog post about it. I'm not going to put in the effort now, but it is an interesting subject with lots of scope for sophisticated commentary on comparative public adminstration teaching and its location by ideological needs for states and their social basis. Still, I thought this observation (via Tyler Cowen, quoting Victor Lieberman's Strange Parallels: Volume 2, Mainland Mirrors: Europe, Japan, China, South Asia, and the Islands: Southeast Asia in Global Context, c.800-1830) was interesting, especially in the light of the Qing 'no new taxes and tax cuts only' ideology:

…best estimates are that during the second half of the 18th century imperial taxes captured only 5 percent of the gross national product in China, compared to 12-15 percent in Russia, 9-13 percent of national commodity production in France, and 16-24 percent of national commodity production in Britain. During the 18th century in Russia, moreover, corvees and military service were far more onerous than in China, where most labor services had been commuted. If we consider that under the Northern Song in 1080, imperial revenue averaged about 13 percent of national income, and under the Ming in 1550 6-8 percent, we find some support for Skinner’s thesis that percentage of the surplus captured in imperial taxes shrank steadily relative to the share retained by local systems.

One the other hand, you may want to take these numbers with a grain of salt: I'm not sure China and France are following the OECD's national accounting standards, as laid out in the 2002 revisions, fully. Some of the figures may reflect aspirations more than reality, and the Qing aspired to low taxes.

March 10, 2011

Making it a priority to "avoid any tax hike today" is the same kind of short-run view which brings us to fiscal catastrophe in the longer run. In the medium-run, much less the long run, this attitude will lead to [much] higher taxes. However much it may masquerade as a low-tax attitude, it is in reality a high-tax attitude.

But those much higher taxes will be paid by high (and non-high) income people in 10 years who aren't the high income people of today, who will be safely retired in 10 years (and paying higher income taxes on their now much smaller but still high incomes).

Grover Norquist says there won't be a 'grand bargain' on the deficit: "The reason it won’t happen is that the Republicans have taken the pledge and made a promise to their constituents that they won’t increases taxes. And I’ve talked to the guys in the House and Senate. They tell me it won’t happen...Every once in awhile, some reporter ekes out a comment from one of them saying everything is on the table, but when they talk to me, they say we’ll talk about anything, but we won’t agree on a tax increase. My position is: Why go into a room and close a door with people who have the history that Conrad and Durbin do? But no, there won’t be a tax increase. That’s not happening. It’s an odd way to spend your time. I think golf and cocaine would more constructive ways to spend one’s free time time than negotiating with Democrats on spending restraint."

February 16, 2010

Peter Davis thinks the as usual postponement of the "21% cut in Medicare physician
reimbursement rates" -- is that the right description of the policy? -- may get hung in the current Senate deadlock. Maybe a good thing.

We may also be back to taxing estates if this keeps up, but in a suboptimal way, i.e. with a capital gains lock in. WSJ:

To see what is at stake, consider how differently this year's and
last year's regimes treat the same asset held by two fictional widows:
Ms. Bentley has total assets of $20 million, while Ms. Subaru's total is
$2 million. Each owns a $110,000 block of the same stock bought for
$10,000 years ago. This simplified example uses a block of stock, but
its logic applies to all appreciated assets, including houses and land.

Under current law Ms. Bentley and her heirs
prosper. If she dies this year and the stock is sold, her heirs will owe
only a $15,000 capital-gains tax, whereas last year the same move would
have incurred nearly $50,000 in estate tax. By contrast, Ms. Subaru's
heirs would have owed nothing last year because the estate was below the
$3.5 million exemption. This year they would owe the same $15,000
capital-gains tax Ms. Bentley's heirs do.

The reason: Under the old estate tax, assets could be written up to
their full value at the death of the owner, and neither widow had to pay
capital-gains tax on the $100,000 increase in the stock last year. But
current law fully taxes gains while imposing no tax on estates. Quite
simply, the demise of the 45% estate tax helps Ms. Bentley and her heirs
more than the 15% tax on appreciation hurts them. For Ms. Subaru, the
reverse is true.

November 11, 2009

This paper analyzes the choice between taxes and cap and trade
systems (also referred to here as a permit system or a quantity
restriction) as methods of controlling greenhouse gas emissions. It
argues that in the domestic context, with proper design, the two
instruments are essentially the same. Commonly discussed differences in
the two instruments are due to unjustified assumptions about design. In
the climate change context and within a single country there is
sufficient design flexibility that these differences can be
substantially eliminated. To the extent that there are remaining
differences, there should be a modest preference for taxes, but the
benefits of taxes are swamped by the benefits of good design; even
though the very best tax might be better than the very best quantity
restriction, the first order of business is getting the design right.

In the international context, however, taxes dominate more strongly.
The design flexibility available within a single country is reduced in
the international context because of the problems of coordinating
systems across countries and minimizing holdouts. Moreover, the
incentives to cheat and the effects of cheating are not equivalent for
the two instruments in the international setting. Because climate
change will require a global system for emissions, these considerations
mean we should favor taxes for controlling greenhouse gas emissions.

I have pretty clear cut preferences for emission taxes over cap and trade schemes, partly for international coordination and political economy reasons. So it is nice to see that topic come up -- it seem surprisingly absent in the discussion. Not clear if Weisbach's analysis holds up under scrutiny, but it seems like analyzing the international dimension is essential for understanding how these schemes are going to work.

October 29, 2009

Bruce Bartlett recommends Junko Kato's book Regressive taxation and the welfare state: path dependence and policy diffusion. I'd not heard of this book, though I read Kato's first book when it came out. Since this is an important and timely topic, I googled some of the recent literature. There's more out there, but these papers that seem to state one perspective, a perspective I'm quite sympathetic to, succinctly. Though I'm not sure political scientists fully understand that labels don't necessarily indicate tax incidence -- or maybe they just need to get their papers out the door.

Using data from approximately 90 countries, I show that the more a state taxes the rich as a percentage of GDP, the more it protects property rights; the more it taxes the poor, the more it provides basic public services. The catch is that total revenue typically has no effect on property rights or basic public services. Furthermore, there is no evidence that states tax the rich to benefit the poor or vice-versa, contrary to state-capture theories; nor is there any evidence that taxes and spending are unrelated, contrary to state-autonomy models. Instead, states operate much like fiscal contracts, with groups getting what they pay for.

This article argues that partisans tax their supporters, challenging, in
particular, the notions that the welfare state is primarily an instrument of
redistribution and that left wing governments tax the rich to benefit the poor.
Using insights from the tax compliance literature, data for 18 OECD countries
from 1970-1999 and historical vignettes from the 1950s onward, I show that
countries with more long-term left influence finance welfare expenditure
primarily through regressive taxes on consumption and labor, rather than
progressive ones on income and capital. Furthermore, I provide preliminary
evidence showing that countries with more right wing influence raise more
revenue from income and capital. These findings indicate that conventional
accounts of partisanship, taxation and the welfare state need re-evaluating.
While left wing and center parties have been vital for the development of the
welfare state, the extent of redistribution is exaggerated. Political parties act
like insurance agents, not Robin Hood.

This paper examines the development of tax regimes across the OECD
countries in the latter part of the 20th century. It pays particular attention to
taxes on labor income. A number of results emerge from this examination. First,
not only do taxes on labor income represent a major drain on private
households; they have become the mainstay of many of these countries’ public
sector finances. Second, taxes on labor income, and not taxes on capital,
appear to be the preferred instrument of finance for those economic and
political interests that advocate and support a strong (and thereby expensive)
welfare state. There is little “free lunch” to be had in these welfare states; if
anything, “socialism in one class” seems to be the rule. Third, while the effort at
financing the welfare state this way comes at cost in terms of loss in
employment, the magnitude of such loss is inversely related to the degree of
wage coordination in the labor market.

The standard explanation for the choice of electoral institutions, building on Rokkan’s seminal work, is that
proportional representation (PR) was adopted by a divided right to defend its class interests against a rising
left. But new evidence shows that PR strengthens the left and redistribution, and we argue the standard view is
wrong historically, analytically, and empirically. We offer a radically different explanation. Integrating two
opposed interpretations of PR – minimum winning coalitions versus consensus – we propose that the right
adopted PR when their support for consensual regulatory frameworks, especially of labor markets and skill
formation where co-specific investments were important, outweighed their opposition to the redistributive
consequences; this occurred in countries with previously densely organized local economies. In countries with
adversarial industrial relations, and weak coordination of business and unions, keeping majoritarian institutions
helped contain the left. This explains the close association between current varieties of capitalism and electoral
institutions, and why they persist over time.

October 28, 2009

In lieu of any posting by me -- out of time and in need of sleep --, a rant from Bruce Bartlett. Bolding is by me.

Yesterday, Mort Zuckerman, owner of the New York Daily News, exercised his prerogative by publishing an essay in that publication complaining that "Obama's spending and borrowing leaves U.S. gasping for air."

This is common criticism among Republicans, who have a vested
interest in blaming everything bad that happens on the Democrats. The
implication is that if voters weren't so stupid and had instead elected
John McCain to be president then the budget would be balanced, the debt
would have disappeared, and the economy would be booming. ..

According to the Congressional Budget Office's January 2009estimate
for fiscal year 2009, outlays were projected to be $3,543 billion and
revenues were projected to be $2,357 billion, leaving a deficit of
$1,186 billion. Keep in mind that these estimates were made before
Obama took office, based on existing law and policy, and did not take
into account any actions that Obama might implement.

Therefore, unless one thinks that McCain would have somehow or other
raised taxes and cut spending (with a Democratic Congress), rather than
enacting a stimulus of his own, then a deficit of $1.2 trillion was
baked in the cake the day Obama took office. Any suggestion that McCain
would have brought in a lower deficit is simply fanciful.

Now let's fast forward to the end of fiscal year 2009, which ended on September 30. According to CBO, it ended with spending at $3,515 billion and revenues of $2,106 billion for a deficit of $1,409 billion.

To recap, the deficit came in $223 billion higher than projected,
but spending was $28 billion and revenues were $251 billion less than
expected. Thus we can conclude that more than 100 percent of the
increase in the deficit since January is accounted for by lower
revenues. Not one penny is due to higher spending. ...

According to the Council of Economic Advisers,
as of August the actual budgetary effect of the February stimulus was
to reduce revenues by $62.6 billion and raise spending by $88.8
billion. Of the spending, the vast bulk went to transfers such as
extended unemployment benefits and aid to state and local governments,
which may have prevented cuts in spending that would otherwise have
occurred but probably didn't do anything to increase spending. Only
$16.5 billion in stimulus funds went to investment outlays for things
such as public works. This is a trivial amount of money in a $14
trillion economy. ...

I continue to believe that the Republican position is nonsensical.
Final proof is that the previously cited CBO report shows total federal
revenues coming in at 14.9 percent of the gross domestic product in
FY2009. According to the Office of Management and Budget,
one has to go back to 1950 to find a year when federal revenues were
lower as a share of GDP. For reference, revenues averaged 18 percent of
GDP during the Reagan administration and were never lower than 17.3
percent - 2.4 percent of GDP above where they are now.

I think there are grounds on which to criticize the Obama
administration's anti-recession actions. But spending too much is not
one of them. Indeed, based on this analysis, it is pretty obvious that
spending - real spending on things like public works - has been grossly
inadequate. The idea that Reagan-style tax cuts would have done
anything is just nuts.

So how did federal outlays fall $28 billion short of their January projections if the stimulus added $88 billion in spending? Did CBO underestimate automatic stabilizers? Did inflation come in that much lower? I don't quite see how you save $100 billion on those effects, or 3% of the budget.

I'm also mystified by why federal revenues are so low -- is this what simple model would predict given income and asset returns? Or are we facing a shortfall in revenues compared to what models would predict? If so, what is going on? I fear firms/households are stalling on tax payments and building up liabilities versus the government, some of which will default.

October 7, 2009

I am puzzled by the the state tax revenue volatility of the last 10 years. With the census department's figures for 2009 Q2 out this week, I see a report in the WSJ: Falling Tax Revenues Slam States.

How does a 17% decline in state tax revenues happen Q2 2008 to Q2 2009? GDP didn't go down 17% -- that decline is around 2.6% for nominal GDP and 3.3% for real GDP. State taxes are not very progressive and should not be this volatile, and the federal tax system with its more progressive tax structure has less volatile revenues (see...to be filled in). Even state income tax and sales tax revenues are down a lot more than GDP, and these taxes are close to linear in most states (though not the income tax for NY -- how about California?):

The biggest drop among major revenue sources was in state income taxes,
which were down 28% from a year ago. Sales-tax revenues fell 9%. .... Eleven states -- including California, New York and Wisconsin -- saw personal income taxes fall more than 30%.

As can be seen from the graph, this puzzlingly high volatility in a relatively new phenomena, with the first year to year decline in state tax revenues during the mild 2001 recession. What is going on? People always talk about the outmoded state revenue systems -- see for instance the recent commission report suggesting a state level VAT in California -- , but how are they generating this time series? I've heard a lot of handwaving about this, but none of it seems to explain the magnitude or the recent amplification of the effect.

My wild guess here is that businesses are withholding income taxes on their employees, but failing to pass them to the states in a timely fashion, using the credit extension this provides to finance operations. Firms do this since a) this is now cheaper financing than what financial markets provide, if you can borrow at all, b) state revenue authorities are more lenient about late payments in recessions. I have been a bit shocked to learn recently how much discretion businesses have here. But I cannot see that effect being so large either. But it must be something like this, with accounting efforts affecting the timing of tax liabilities or payments.

The United States is awash in a sea of debt. In the midst of the
most severe recession since the Great Depression, loan delinquencies
and charge-offs are at levels heretofore unknown in the modern
financial era. Every loan charge-off and mortgage foreclosure has tax
consequences. While the creditor most often claims a bad debt deduction
or business related loss, the debtor generally must recognize gross
income and pay income taxes on an amount roughly equal to the
creditor’s loss, unless a special exception applies to exclude the debt
relief from income. This article deals with the tax consequences to the
debtor of the discharge of a debt for less than full payment. It first
explain the origins and rationale for the rule, now codified in §
61(a)(12), that requires the inclusion of '[i]ncome from discharge of
indebtedness.' The article then examines the various events that
trigger recognition of income under § 61(a)(12). Following that
discussion, the article deals with the manner in which the amount of
income from discharge of indebtedness is computed. This part of the
article also discusses the tax consequences to a business entity that
issues an equity interests to a creditor to satisfy a debt. Finally,
the article explores the myriad of statutory rules in §108 that permit
nonrecognition income from discharge of indebtedness under particular
circumstances, and the various ancillary consequences that follow from
nonrecognition. Throughout, the article explores the relationship of
income from discharge of indebtedness to realization of gain from the
transfer of property to satisfy a debt by contrasting the tax
consequences of transfers of property to discharge a debt with the
consequences of discharge of a debt for less than full payment.

September 19, 2009

Back in the New Haven suburbs the NHR reports -- one issue untouched in the reporting is how much of this occurs and the extent to which these rules are enforced in a discretionary manner:

Police have arrested a New Haven man and an Orange woman who allegedly
conspired to illegally send two children to Amity Regional High School,
and officials are hoping to recoup nearly $76,000 in tuition.

Superintendent
of Schools John Brady said this is the first time in his educational
career he has had to refer a residency matter to police, but because
the students received an education illegally for six years, he had no
choice.

“It’s a theft of service,” Brady said. “One can
empathize with families seeking the best quality of education. We have
an obligation to ensure taxpayer money is being spent on educating
students who live in our towns.”

Brady said he hopes a judge
will require the suspects to pay back taxpayers of Orange, Woodbridge
and Bethany who collectively fund the Amity school system.

Police said the investigation
began in June when Brady received information concerning two possible
residence violations and notified police. An investigation conducted by
police and school personnel confirmed that two students, who are
brothers, had been attending Amity Regional High School in Woodbridge,
and Godenciuc allegedly had falsely reported to school officials that
the brothers lived in Orange.

One of the students graduated in
June after attending all four years, while the other student attended
the past two years, police said. Police and school officials declined
to state the relationship between Godenciuc and Antonyshyn. Brady said
an anonymous phone call sparked the investigation.

Police and school officials said they determined educating the two students over six years cost the district $75,990.

September 18, 2009

Harvard Law School’s biggest donor, who died last week in an
apparent suicide, may have owed up to $100 million in back taxes and
fines, the New York Times reported this week.

Finn M.W. Caspersen,
who gave over $30 million to the Law School and tens of millions more
to other philanthropic enterprises, may have been implicated in a
sweeping federal investigation of offshore bank accounts, said the
Times’ anonymous source. ...

According to the Times’ source, federal authorities have placed
liens on the personal trusts of Caspersen’s four sons, all of whom also
attended the Law School.

When it comes to enforcing pledges, charities have demonstrated a
timidity not characteristic of their solicitation practices. Charities
seem to fear the loss of subscribers if it became practice to sue to
enforce the subscriptions. Indeed, a review of the reported cases shows
that the great majority of such actions were brought only after the
death of the subscriber, when the charity was willing to dispute with
the heirs over the assets.

September 17, 2009

One reason the Baucus bill is “cheaper” than the House bill is that
it has lower subsidies. For illustration, let’s assume that the whole
$140 billion difference is due to lower subsidies. Relative to the
House bill, then, the Baucus bill costs the government $140 billion
less; but it costs middle-income people exactly $140 billion more,
since they have to buy health insurance. The difference is that in the
House bill, the money comes from taxes on the very rich; in the Baucus
bill, it comes out of their own pockets. Put another way, the Baucus
bill is the House bill, plus a $140 billion tax on people making around $40-80,000 per year. That’s not only stupid policy; it’s stupid politics.

Can't argue with that. As regular readers know, I'm more concerned
with subsidy levels than I am with the public option. This is why.
The public option is a good thing, but even in the best case it's
available to only a small number of people and will likely have only a modest impact
on the cost of health insurance. Subsidy levels, conversely, affect
lots of people and have a significant impact on the cost of health
insurance. According to CBPP,
for example, a family making $45,000 would have to pay annual premiums
of $4,800 under the Baucus plan, compared to $3,600 under the House
plan or $2,500 under the Senate HELP plan. That's a pretty big
difference.

So: adopt the the Baucus version of subsidies and when 2013 rolls
around you'll have lots of pissed off middle income families
desperately trying to scrape up an extra five grand each year. Adopt
the HELP version of subsidies instead and these registered voters
families will mostly think they're getting a pretty good deal. And to
fund it, all you have to do is raise taxes on, say, Wall Street
bankers. What's not to like?

See also the WSJ on the lower middle class squeeze in Massachusetts after health reform.

I have no comments right now, since the comments above raise quite a few questions that would take quite long to address even superficially...again, better analysis and data would be helpful. But I do want to mention that it is my impression that in Germany redistribution in health care financing is from the middle class to the lower classes, with upper middle class and above households contributing little, something that is built into the institutional structure of the system. But I need to look into it more...

September 8, 2009

Since I'm moving to an even higher wage and higher cost location, I though I'd mention this. The point -- despite what the title of the article may imply -- isn't that redistribution from higher income to lower income persons is bad, but that who is higher income in real terms is mismeasured by the US tax system and that this mismeasurement has efficiency costs. Do other countries do better on this dimension?

In the United States, workers in cities offering above‐average wages—cities with high productivity, low quality of life, or inefficient housing sectors—pay 27 percent more in federal taxes than otherwise identical workers in cities offering below‐average wages. According to simulation results, taxes lower long‐run employment levels in high‐wage areas by 13 percent and land and housing prices by 21 and 5 percent, causing locational inefficiencies costing 0.23 percent of income, or $28 billion in 2008. Employment is shifted from north to south and from urban to rural areas. Tax deductions index taxes partially to local cost of living, improving locational efficiency.

June 25, 2009

As you have doubtless seen elsewhere, two Metro trains collided when
one train ran into the back of a stopped train, killing at least nine
and injuring over 75 others. The first car of the moving train was,
the Washington City Paper reports, the oldest type of Metro car in the system, a 1000-series Rohr car.

The City Paper reports that the National Transportation Safety Board
repeatedly recommended that Metro (more formally known as the
Washington Metropolitan Area Transit Authority, or WMATA) retrofit or
replace these older cars, but Metro refused. Why? Because “WMATA is
constrained by tax advantage leases, which require that WMATA keep the
1000 Series cars in service at least until the end of 2014.”

What are these “tax advantage leases”? They appear to bestandard sale-leaseback transactions,
in which WMATA sold equipment, including train cars, to another party
and now leases it back. The other party gets various tax advantages
(depreciation, credits, and so forth) associated with owning the
equipment, and WMATA, which as a tax-exempt organization
cannot use these advantages, gets cash. But apparently the leases did
not include language that permits WMATA to break the leases if newer,
safer equipment comes along.

May 6, 2009

The compromise version of
“cash-for-clunkers” announced by the House offers prospective car
buyers between $3,500 and $4,500 vouchers for trading in old cars to
get new ones. But the bar is set really, really low.

For passenger cars, “clunkers” that get less than 18 miles per
gallon can be traded in—for cars that get at least 22 miles a gallon.
The corporate average fuel economy for new cars is 27.5 miles a gallon

If the new car is 4 mpg more efficient, the consumer will get
$3,500. If the new car offers a 10 mile-per-gallon improvement, the
payout rises to $4,500.

Things don’t get any more ambitious when it comes to light trucks.
Says the House Energy and Commerce Committee plan: “New light trucks or
SUVs with mileage of at least 18 mpg are eligible for vouchers.” A
similar sliding-scale payout applies.

The problem with all this, as Duke’s Bill Chameides pointed out last month,
is that making a new car produces, on average, about 6.7 tons of carbon
dioxide. By his calculations, it would take at least five years to “pay
off” the environmental impact of building the new car with a
22-mile-per-gallon purchase. That SUV might be even worse—the estimated
payback time is almost 20 years.

18 mpg...wow. I was sort of proud that the US wasn't engaging in the German Abwrack-Prämie nonsense...oh well, it looks like we're going to get an even worse version of the scheme in the US now.

April 28, 2009

I e-filed my taxes this week after the customary extension on April 15 (I've not filed before April 16 since I've been married). One thing I've been wondering about: since e-filers do not sign their returns and just verify their identity by providing their Social Security numbers and the AGI [adjusted gross income] from the previous year's income tax filing (as well as making up PIN numbers for later access to the tax filing), how does this affect spouses? With paper tax filings, the spouse has to sign the tax return and this provides some evidence that the spouse has at least seen the tax return and maybe read some of it, for instance the AGI number. How many husbands file electronically and don't involve their spouse at all? I know of husbands who don't tell their wives what they earn, understating their income substantially, and this just further their ability to keep their wives in the dark. I assume it isn't uncommon.

In my case, I told my wife I was filing and she didn't request to review it. So no, she didn't see this tax return, though she will get to file the print-out of the pdf (but I need to get a new toner cartridge first).

April 24, 2009

S.857 : A bill to amend the Internal Revenue Code of 1986 to
allow a $1,000 refundable credit for individuals who are bona fide
volunteer members of volunteer firefighting and emergency medical
service organizations.Sponsor: Sen Schumer, Charles E. [NY] (introduced 4/22/2009)

TaxVox writes:

Some of these provisions might have merit as tax policy, but
the really noteworthy feature is that there are a lot of them, almost
all would cost tax revenues, and some would take the tax system into
brand new areas. (Should the IRS run a cash grant program for
volunteer firefighters and emergency medical workers? Who will certify
the bona fides for eligible recipients? And is it still “volunteer” if
you’re getting $1,000 from the feds to do it?)

Most, if not all, of these proposals are going nowhere. Senator
Schumer will probably get an award from the Association of Volunteer
Firefighters for his support and that will be the end of it. But
wouldn’t it be great if members of congress applied as much creativity
to making the tax system simpler, fairer, and capable of financing the
government as they spend on finding new ways to undermine the tax base?

And what is the federal policy interest in promoting, at the extensive margin, volunteer firefighter and emergency service organization membership numbers? I could see, maybe, funding a retention program for volunteers who are somehow judged valuable, or a training program, or a recruitment program. But is a cash payment to all volunteers a good idea? Why is this a federal interest?

April 12, 2009

The FAZ has an article that raises an issue I've thought about quite a bit, but haven't written about here yet: the targeting of child support measures by parent quality, especially in the tax structure. Having a decent theoretical and empirical framework that can accommodate the multiplicity of interests at stake here would be welcome, and lots of the public discussion doesn't have either.

March 31, 2009

This is pretty much the point Mihir Desai makes in his work on taxes
and corporate governance. Once there is a planning excuse for complex
structures [i.e. tax avoidance or regulatory avoidance], they can be used for multiple nefarious purposes, e.g., tax
fraud, avoiding internal and market as well as formal regulatory
oversight, looting the company, etcetera.

Complex structures
kill transparency. At the limit, they make corporate governance
impossible and genuinely profitable activity by publicly traded
companies a pipe dream. To some extent, this is a problem of financial
not "real" activity, as the latter is much easier to observe. E.g.,
Apple Computers and General Motors both are presumably well-judged by
the market because to a considerable extent one can see how well or
poorly they are doing. But even companies engaged in real productive
activity often have such large finance wings (think GMAC, or GE's
recent problems) that the virus of non-transparency extends well beyond
the pure banking and finance sector.

In general I think the relationship between internal firm governance and the tax system is insufficiently studied and taught. Taxes can be efficiently collected to a great degree only because it in the interest of firm owners to organize firms to document income for internal control reasons (i.e. deciding how to run the firm by seeing what activities are profitable and making sure employees don't loot the firm) and the state can then observe and tax this income. This also applies to making income streams for employees and small firms visible when they are employed by or hired by large firms with greater internal control need for documenting transactions.

This means, for instance, that small family owned firms with family members as workers selling to individuals are the most efficient firms at tax evasion, simply because they have little need to truthfully document income streams in a way the state can observe. On the other hand, if entities like AIG try this things can go terribly wrong: having an excuse to hide things, even just via complex structures, from the state can mean hiding it from top management and firm owners as well and loosing control of the firm.

This paper investigates the relationship between trade openness and the size of
governments, both theoretically and empirically. We argue that openness can increase
the size of governments through two channels: (1) a terms of trade externality, whereby
trade lowers the domestic cost of taxation, and (2) the demand for insurance, whereby
trade raises risk and public transfers. We provide a uni ed framework for studying
and testing these two mechanisms. Our main theoretical prediction is that the relative
strength of the two explanations depends on a key parameter, namely, the elasticity of
substitution between domestic and foreign goods. Moreover, while the first mechanism
is inefficient from the standpoint of world welfare, the second is instead optimal. In
the empirical part of the paper, we provide new evidence on the positive association
between openness and government size and we explore its determinants. Consistently
with the terms of trade externality channel, we show that the correlation is contingent
on a low elasticity of substitution between domestic and foreign goods. Our findings
raise warnings that globalization may have led to ineffciently large governments.

As they write at VoxEU:

More open countries have larger public sectors because the cost of
providing public goods is lower the higher a country’s involvement in
foreign trade. The basic idea is that an expansion of the public sector
crowds out private production, thereby reducing the domestic supply of
exports. As long as the world demand for domestic products is downward
sloping, a fall in domestic exports brings about a terms-of-trade
improvement that partly compensate the increase in public expenditures.
In other words, the rise in export prices shifts some of the costs of
the public sector onto foreign consumers. This effect is stronger in
more open economies, because the real-income effect of terms-of-trade
movements is proportional to the volume of trade. Moreover, such a
terms-of-trade improvement materialises independent of whether a
country is large or small, provided that it produces differentiated
goods. For instance, given that Nokia’s mobile phones are perceived as
different from Motorola’s, even a country as small as Finland is a
price setter in world markets. Hence, insofar as the price of a Nokia
mobile reflects high domestic taxes, every unit sold to foreigners
provides a subsidy to the Finnish welfare state.

In our data, we find that the positive correlation between openness
and government size holds strongly only for countries producing
differentiated products. Moreover, simple calibrations suggest that the
mechanism illustrated above is quantitatively relevant, as it can
explain the entire empirical correlation between openness and
government size, and between one-third and one-half of the overall
average increase in public spending over the second half of the last
century.

That the growth in governments’ size is driven by terms-of-trade
considerations may appear implausible at first. It is less so once it
is understood that terms of trade and relative wage are closely related
in open economy, for any policy that increases the relative demand for
domestic labour also affects positively the terms of trade. This is
indeed the case with public expenditure. A shift in the composition of
expenditure from private to public raises the relative demand for
domestic labour, because public goods and services are produced almost
entirely locally, whereas private goods are partly imported. Evidence
on this is compelling. In a sample of developed and developing
countries with available data, we find that the average import share in
government consumption is 1%, versus an economy-wide import share equal
to 50%.

Hence, the logic behind our results is closely related to the
Keynesian view that public expenditure can be used to sustain demand
for domestic labour. The current crisis offers numerous examples of how
globalisation affects this logic. For instance, when asked how to give
a stimulus to the US economy, a PIMCO spokesman said: "Consumers will
just buy more Chinese goods with stimulus package money, more of the
same. What is needed is public investment to fill demand void of
private sector". This is the mechanism we stress in action. In a world
of integrated product markets, sustaining demand via public spending is
considered more effective than a tax cut.

I need to look into this more. Their results do seem to show up in the standard version of the differentiated trade model people use now, but that model has all sorts of weird simplifying features that means one has to think seriously about how robust results are and how applicable to the real world.

My first concern is that differentiated producers like Nokia already fully exploit their market power and that hence there is little government can do to impose an additional pecuniary externality on the rest of the world. At least one would want to look into the issue of how firms and the government interact in setting prices, both statically and dynamically, in differentiated goods industries with firm specific capital (and consumer habits). Which reflects one of my pet peeves about this literature, the lack of dynamic demand systems with distinct short and long-run demand.

Update #1: Another paper from the same authors that also works through what appears to be a model very close to the standard model, though I should check: Procompetitive Losses from Trade

We argue that the procompetitive effect of international trade may bring about significant welfare costs that have not been recognized. We formulate a stylized general equilibrium model with a continuum of imperfectly competitive industries to show that, under
plausible conditions, a trade-induced increase in competition can actually amplify monopoly
distortions. This happens because trade, while lowering the average level of market power,
may increase its cross-sectoral dispersion. Using data on US industries, we document a
dramatic increase in the dispersion of market power overtime. We also show evidence that
trade might be responsible for it and provide some quanti cations of the induced welfare
cost. Our results suggest that, to avoid some unpleasant effects of globalization, trade
integration should be accompanied by procompetitive reforms (i.e., deregulation) in the
nontraded sectors.

March 27, 2009

You may claim a kidnapped child as your dependent if the following requirements
are met:

The child must be presumed by law enforcement to have been kidnapped by
someone who is not a member of your family or a member of the child's family,
and

The child had, for the taxable year in which the kidnapping occurred,
the same principal place of abode as the taxpayer for more than one-half of
the portion of such year before the date of kidnapping.

If both of these requirements are met, the child may meet the requirements
for purposes of determining:

The dependency exemption

The child tax credit, and

Head of household or qualifying widow(er) with dependent child filing
status.

This tax treatment will cease to apply as of your first tax year beginning
after the calendar year in which either there is a determination that the
child is dead or the child would have reached age 18, whichever occurs first.

For more information, refer to Publication 501, Exemptions, Standard
Deduction, and Filing Information.